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Sydnee Gatewood
Sydnee Gatewood
Articles (2230) 

Oakmark Funds Commentary: A Perspective on Investing During the Coronavirus Crisis

By Daniel A. Nicholas, CFA and Client Portfolio Manager

June 02, 2020 | About:

Two months of working from home is behind us, and I hope everyone has adjusted to a new rhythm. My transit commute has been reduced to a walk up or down the stairs. Going up is a date with my laptop, coming down is a workout in the basement.

My wife, a clinical psychologist, is now doing tele therapy from home. We are each dealing with our own varieties of crisis right now, mental and financial. Although I thought we had vastly different jobs, we’ve come to realize our professions have some key overlaps. Both of us are helping our clients deal with fear—through adaptive and maladaptive responses– so they can have better outcomes.

During our thousandth quarantine walk with our little lapdog, my wife explained his peculiar behavior of sprawling on the sidewalk playing “dead” when another dog approached. His stress response, much like our own, is instinctual and a self-protective reaction for survival. Each animal has three choices when confronted with a threat: 1) fight; 2) flight; or 3) freeze. Weighing in at a whopping 12 pounds, our dog is a “freezer” since he will lose if he tries to fight or flee from his perceived threat. Although his response may appear weak, my wife clarified that it’s quite genius and effective.

Financially speaking, we have seen some of our clients instinctively act to self-protect and overcontrol their investments to mitigate the threat of great economic stress created by the coronavirus. The “fight” response has led some to lash out, calling for portfolio managers to take immediate action, perhaps so they can feel like something is being done. Why hold onto the stocks that have underperformed? Why not own less cyclical companies and avoid European ones all together? The tone and tenor of our shareholders’ response is an understandable mix of fear and anger, desiring action to guard against the economic perils caused by this virus.

Alternatively, their “flight” response has led some to pull out of their funds and go to cash. More than $300 billion has been pulled from active and passive equity mutual funds year to date and the savings rate shot up from 8% to 13% in March, hitting its highest level since 19811.

However, overreacting in the face of this downturn doesn’t mean investors’ portfolios may be any safer. In fact, they could end up worse off, which is why “freeze” might be the best course of action. A review of our Oakmark funds reveals that it has been costly for our clients to trade at the wrong time. Missing out on the top 10 days of returns in the market reduces returns by nearly 3% annually since inception. It’s even more consequential when looking at missing out on the top 30 returning days where returns would be cut in half. Taking action today to make ourselves feel better could lead to missing out on having exposure to the eventual recovery. I think that’s partially why the latest bull market was coined the most hated in history. I believe investors sold and never rebalanced back to their optimal asset allocation.

Oakmark performance table as of 03/31/2020

*OAKMX inception 08/05/1991, OAKLX inception 11/01/1996, OAKBX inception 11/01/1995, OAKGX inception 08/04/1999, OAKWX inception 10/02/2006, OAKIX inception 09/30/1992, OAKEX inception 11/01/1995

Throughout our firm’s 40-year history, our investment team has experienced market declines of more than 10% on average every 12-18 months, 15% every two years, and 20% or more every 3½ years. Around 9/11, we were able to pick up Carnival Cruise Lines as the market shunned travel-related stocks. We ultimately held it for three years until we believed it became more appropriately priced. Likewise, today we are able to own global leaders in leisure, including Hilton, Booking Holdings and Ryanair, at a fraction of our estimates of their value. This volatility is the norm, not the exception. It’s important to avoid making rash decisions based on emotion or instinct when share price volatility picks up.

At Oakmark, we remain laser focused on measuring the difference between what we think the business is worth and its current share price. This empowers us to act when others are fleeing the markets. Through experience, we know that business values are far less volatile than stock prices. And, if you are patient enough, share price ultimately converges with business value. Spikes in volatility provide the raw material for active managers to exploit.

As a long-term investor, you won’t see us making wholesale changes to the names in our portfolios–but this shouldn’t be mistaken for inactivity. Research activity has been frenetic as we fine-tune estimates to existing holdings and hunt for companies that were “thrown out with the bathwater.” Our conversations with management teams continue unabated, just over video rather than in person. And new idea activity is on pace to double the typical level.

Our portfolio managers are trimming our winners and intentionally adding to the companies whose businesses are performing as expected but the stocks have underperformed to try to benefit from the new reality. At the market lows, we identified many companies that met our stringent investment standards and that were trading at below 40 cents on the dollar. As we pick up these so-called bargains, even if their share prices were volatile in 2020, we think it actually de-risks our portfolio. By keeping the portfolio fresh and forward facing, we believe we are setting the stage for performance over the next five years. “Freezing” or, as we prefer to say, “staying the course” is the most adaptive thing we can do.

1Natixis Investment Managers. (2020). U.S. Mutual Fund & ETF Industry Marketplace and Peer Analysis.
La Monica, Paul R. (2020). Americans are hoarding cash: Savings rate hit its highest level since 1981. Retrieved from: https://www.cnn.com/2020/04/30/investing/savings-rate-federal-reserve/index.html

Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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